By Moises Rendon

It’s no coincidence that Hong Kong, Shenzhen and Dubai have been beacons of economic progress. These areas have attracted the most important high-technology firms and received vast influxes of foreign direct investment (FDI) in recent years. The three share a successful history of operating as what is known as a Special Economic Zone (SEZ), a unique regulatory status which has facilitated rapid economic development. While China, the United Arab Emirates, and other countries have reaped the benefits of SEZs, South American countries have yet to realize the potential benefits SEZs might offer their economies.

An SEZ is a demarcated geographic area within a country’s national boundaries where the rules of business are different from those that prevail in the surrounding territory. Compared to the economic regulations of the host countries, these zones typically include more friendly investment conditions, such as tax and customs exemptions. The goal is to create a globally competitive economic area that, through cost reductions and administrative simplification, attracts corporate investments to encourage new economic activity.

Shenzhen was the first SEZ in China, and remains an economic hub.

There are currently about 4,300 SEZs in 73 countries around the globe. An estimated 68 million people work in these zones worldwide, and the popularity of adopting SEZs is increasing rapidly. Myanmar and Qatar recently disclosed SEZ projects to boost their economies, and, President Peña Nieto just unveiled new plans to develop SEZs in Mexico’s poorer southern states. Saudi Arabia, taking advantage of its vast oil revenues, has set ambitious goals for creating six of these zones with hopes of creating 1.3 million employment opportunities by 2020. Even though there are significant advancements toward incorporating more SEZs in Central America and the Caribbean, South America—with a few exceptions like Uruguay and Colombia—still lags behind.

SEZs are viewed as highly effective tools for generating jobs, increasing export growth, attracting foreign investment, transferring technology, and developing workforce skills. For example, employment in the Dominican Republic’s industrial free zones has risen from 500 in 1970 to almost 200,000 today. In China, it was estimated that in recent years, SEZs have accounted for about 22% of national GDP, 46% of FDI, and a whopping 60% of exports, all the while generating more than 30 million jobs. Dubai has attracted more than 2,000 mostly foreign-owned enterprises, and is host to around 24 SEZs, including the widely famed Dubai Media City.

There are various resources to help countries, particularly those new to SEZs, stimulate economic activity. Management consulting firms take on this role, and widely available case studies offer lessons on success and failure in SEZ implementation. Enterprise Cities is one such company that is currently helping countries like Morocco and India become more competitive and dynamic by creating incentives for businesses through SEZs. In these newer zones that cater to the 21st century service economy, emphasis on building infrastructure and using local businesses as partners is key to ensuring sustainable economic growth and fostering innovation. South American governments thus should take advantage of these opportunities and engage in a continuous process of improving the investment climate and evaluating the implementation of SEZs that could boost their economies.

However SEZs do not come without cost. The incentives offered to attract investors mean forgone tax revenues, at least in the short term. SEZs can also create distortions inside their respective host economies, which is one reason why nationwide liberalization measures are typically better than patchwork efforts. SEZs can also be exploited for money-laundering purposes, or used for bribes. To ensure that these costs are mitigated and SEZs can still provide the desired increases in jobs and investment, governments must learn from the successes and failures of other countries. Sound and transparent zone management that is independent from (but still working in cooperation with) the government is key. South American countries considering creating their own SEZ could learn from others in the region that have experimented with SEZs:

• Uruguay’s Zonamerica is one of the cutting-edge SEZs oriented towards IT, software, bio-technology and electronics operations. With more than 350 companies (including Citi, Deloitte, PwC) housed in Zonamerica, there are 10,000 people directly employed, contributing to 1.5% of the GDP of Uruguay. An even bigger Zonamerica project in Cali, Colombia will start operations in the next few weeks.
• Chile’s largest SEZ, Zofri, is located in the northern coast in the city of Iquique, providing 25% of the local employment, and boosting one of the best performing economies of the continent.
• The Dominican Republic, El Salvador, and Honduras use SEZs to take advantage of preferential access to U.S. markets and have generated large-scale manufacturing sectors in economies that previously were reliant on agricultural commodities.

SEZs are by no means a magic bullet for economic development. However, there have been multiple encouraging examples, including those in Latin America, where SEZs have benefited local people and the country at large. In 1980 we saw “the Miracle of Shenzhen” in China, rising as one of the most successful SEZs in modern history. The majority of South American zones are relative latecomers to this form of innovative economic policy. South American countries have the opportunity to learn from the experience and lessons from the SEZs established around the world, and start generating their own “miracles” across the continent.

Moises Rendon is research intern with the Project on Prosperity and Development.

Image courtesy of wikimedia user SSDPenguin under a Creative Commons Attribution 3.0 Unported License.